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Priced Out of His Life Insurance Policy

The case: Did an insurance company mislead policyholders before raising premiums?

Robert Rakes purchased a long-term care insurance policy from Life Investors Insurance Company of America in 1994. Prior to the purchase, an agent met with him, assuring him that he could renew the policy regardless of age or health changes, as long as he paid his premium on time. For 10 years Rakes paid an annual premium of $1,006.20. But in 2004 the premium increased to $1,408.68.

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As a Virginia resident, Rakes contacted his state bureau of insurance and found it had approved the rate hike. Life Investors was raising rates because the "insurance block" that Rakes was part of had been closed to new policies. Premiums would probably increase again, since there would be more claims and fewer policyholders.

In May 2007, Rakes' premium jumped to $1,901.64 per year. With his rate nearly doubled, Rakes opted to convert the policy to a "contingent non-forfeiture benefit," meaning that the maximum he would be paid by the company would be the amount he had contributed as premiums.

After discovering that other people had also received unexpected rate hikes from Life Investors, Rakes brought a class action lawsuit against the insurance company, claiming fraud and bad faith. He said Life Investors underpriced its insurance on purpose by inflating the "lapse rate," which is the number of people it estimated would drop the insurance before collecting benefits.

Rakes alleged that Life Investors planned from the beginning to increase premiums. Rather than disclosing this rate hike plan when he bought his policy or when he renewed, Rakes said, Life Investors had kept it secret, emphasizing that the policy was "guaranteed renewable." Rakes argued that the right of renewal was meaningless if he was priced out of his policy. Rakes also claimed that Life Investors used false reasons to justify the rate increases.

Life Investors moved to dismiss. Janet Soppe, Life Investors' Long-Term Care division president at the time, testified that the company's intention was to keep premiums the same. Robert Darnell, the actuary who priced Rakes' policy, testified that "there was never discussion of any plan to increase Life Investors' long-term care insurance premium rates." Life Investors also noted that it had disclosed its right to raise premiums in Rakes' contract.

Was the insurance company dishonest?

A district court ruled against Rakes, and he appealed. The Court of Appeals for the 8th Circuit found that Rakes and the other plaintiffs were not guaranteed a certain premium for life, but only the right to renew their insurance. Life Investors disclosed its right to change premium rates on the first page of its policies, in boldface capital letters, and Rakes testified that he knew this. There is no law that requires an insurance company to disclose its actuarial assumptions to policyholders. Nor must it notify policyholders that more claims had been made than the company had anticipated. Rakes' fraud claim was denied.

Robin Gerber is an attorney and writer based in Maryland.

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